The 20-year-old Werribee man is taken into custody. Photo: Victoria Police

An Australian-born man and citizen has been arrested after allegedly planning to carry out a terrorist attack with an automatic rifle at Melbourne's Federation Square on New Year's Eve this year.

The 20-year-old man, who was arrested in Werribee on Monday afternoon, was allegedly planning to shoot and kill as many people as he could in an attack at Federation Square.

Victoria Police deputy commissioner Shane Patton said the Australian-born Muslim with Somalian parents sought to purchase, but did not acquire, an automatic weapon to carry out the attack that could have had "horrendous" consequences.

The suspect was allegedly planning to shoot and kill as many people as he could in Federation Square. Photo: Victoria Police

"The potential of the attack is catastrophic. This is a person who has expressed an intention to try and kill as many people as he could. It's horrendous," Mr Patton said.

The young man allegedly tried to buy an automatic firearm through "face to face interactions" but was ultimately unsuccessful, Mr Patton told reporters on Tuesday.

"We have been monitoring him for a very lengthy period of time," Mr Patton said.

"He's an Australian citizen and of Somalian parents."

The man lives with his parents and siblings at the family home in Werribee.

That property is still being searched by police while his place of work, a computer business in Footscray, and a relative's home in Meadow Heights are no longer being searched after warrants were executed at those locations on Monday.

The young man was in possession of an al-Qaeda guidebook on how to carry out terrorism attacks and is an Islamic State sympathiser, police allege.

"He has accessed documents produced by al-Qaeda Arabian Peninsula ... a guidebook in respect to how to commit a terrorist act and also how to use firearms, guns and handguns and rifles," Mr Patton said.

"He is associated with other persons in the Victorian extremists community ... it is a very small community of extremists.

Fireworks over Melbourne CBD on New Years Eve. Photo: Melbourne City Council

"This is a person who would become particularly energised when overseas events occurred. He expressed a great amount of interest in committing an attack himself."

The 20-year-old man was arrested on a street in Werribee just after 3pm on Monday.

Mr Patton reassured the community the man was acting alone and no threats were ongoing.

"We are not looking for any other suspects," he said.

Authorities are still investigating how the young Werribee man became radicalised, Mr Patton said.

Police do not believe he is linked to any mosques in Melbourne. They would not reveal if his family or friends knew of his intentions.

He was born in Australia and this is his first time in custody.

The man is expected to be charged later on Tuesday with engaging in acts in preparation for a terrorist offence and collecting documents to facilitate a terrorist act.

Police expect him to appear at Melbourne Magistrates Court later today or the early hours of tomorrow.

Victoria Police, Australian Federal Police and ASIO were involved in the investigation that resulted in the young man's arrest.

Police do not anticipate further arrests.

Police Minister Lisa Neville said police were continuing their investigation, but had foiled another threat.

"Absolutely police were aware of this very early and had been monitoring," she said.

"There was never any point in which there was a significant risk."

She said there were still search warrants under way to gather evidence for the charges likely to be laid later on Tuesday.

"I can absolutely assure Victorians that this has eliminated the risk," she said.

Ms Neville said Victorians should be confident to make plans for New Year's Eve.

"There is no ongoing risk to the Victorian community."

An estimated 450,000 people flock to Melbourne's CBD to ring in the new year in the city.

Security has been ramped up in recent years, particularly last year after police foiled a Christmas Day terror plot.

Hundreds of uniformed police swarmed the city last New Year's Eve, particularly near St Paul's Cathedral and Flinders Street Station which were both targets of the Christmas terror plot.

Specialised squads including Water Police, Mounted Branch, Operations Response Unit and Air Wing were deployed across the state.